[Federal Register Volume 70, Number 71 (Thursday, April 14, 2005)]
[Proposed Rules]
[Pages 19858-19875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-7376]



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Part III





Department of Housing and Urban Development





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24 CFR Part 990



Revisions to the Public Housing Operating Fund Program; Proposed Rule

  Federal Register / Vol. 70, No. 71 / Thursday, April 14, 2005 / 
Proposed Rules  

[[Page 19858]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 990

[Docket No. FR-4874-P-07, HUD-2005-0005]
RIN 2577-AC51


Revisions to the Public Housing Operating Fund Program

AGENCY: Office of the Assistant Secretary for Public and Indian 
Housing, HUD.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would revise the regulations for the Public 
Housing Operating Fund Program (Operating Fund Program). Through the 
Operating Fund Program, HUD determines the allocation of operating 
subsidies to public housing agencies (PHAs). HUD developed the proposed 
rule with the active participation of PHAs, public housing residents, 
and other relevant parties using the procedures of the Negotiated 
Rulemaking Act of 1990. These regulatory changes reflect the 
recommendations made by the negotiated rulemaking committee, with some 
modifications, on ways to improve and clarify the current regulations 
governing the Operating Fund Program and take into consideration the 
recommendations of the congressionally-funded study by the Harvard 
University Graduate School of Design on the cost of operating well-run 
public housing.

DATES: Comments Due Date: June 13, 2005.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Regulations Division, Office of General Counsel, Room 
10276, Department of Housing and Urban Development, 451 Seventh Street, 
SW., Washington, DC 20410-0500. Electronic comments may be submitted 
through either:
     The Federal Rulemaking Portal: at http://www.regulations.gov; or
     The HUD electronic Web site at: http://www.epa.gov/feddocket. Follow the link entitled View Open HUD Dockets.'' Commenters 
should follow the instructions provided on that site to submit comments 
electronically.
    Facsimile (FAX) comments are not acceptable. In all cases, 
communications must refer to the docket number and title. All comments 
and communications submitted will be available, without revision, for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Copies are also available for inspection and downloading 
at http://www.epa.gov/feddocket.

FOR FURTHER INFORMATION CONTACT: Elizabeth Hanson, Public Housing 
Financial Management Division, Office of Public and Indian Housing, 
Department of Housing and Urban Development, 550 12th Street, SW., 
Suite 100, Washington, DC 20024; telephone 202-475-7949 (this telephone 
number is not toll-free). Individuals with speech or hearing 
impairments may access this number through TTY by calling the toll-free 
Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 519 of the Quality Housing and Work Responsibility Act of 
1998 (Pub. L. 105-276, approved October 21, 1998) amended section 9 of 
the United States Housing Act of 1937 (42 U.S.C. 1437 et seq.) (1937 
Act). As amended, section 9 of the 1937 Act establishes an Operating 
Fund for the purpose of making assistance available to public housing 
agencies (PHAs) for the operation and management of public housing. 
Section 9 of the 1937 Act also requires that the amount of the 
assistance to be made available to a PHA from that fund be determined 
using a formula developed through negotiated rulemaking procedures as 
provided in subchapter III of chapter 5 of title 5, United States Code, 
commonly referred to as the Negotiated Rulemaking Act of 1990 (5 U.S.C. 
561 et seq.).
    Negotiated rulemaking for an Operating Fund Program was initiated 
in March 1999, and the negotiated rulemaking committee consisted of 25 
members representing PHAs, tenant organizations, community-based 
organizations, and the three national organizations representing PHAs--
Public Housing Authorities Directors Association (PHADA), Council of 
Large Public Housing Authorities (CLPHA) and National Association of 
Housing and Redevelopment Officials (NAHRO). The negotiated rulemaking 
committee concluded with a proposed rule, published on July 10, 2000 
(65 FR 42488), which was followed by an interim rule published on March 
29, 2001 (66 FR 17276). The March 29, 2001, interim rule established 
the Operating Fund Program regulations that are currently in effect. 
These regulations are located in part 990 of HUD's regulations in title 
24 of the Code of Federal Regulations.
    During the negotiated rulemaking for the Operating Fund Formula, 
Congress directed that HUD contract with the Harvard University 
Graduate School of Design (Harvard GSD) to conduct a study on the costs 
incurred in operating well-run public housing (Cost Study). This 
Congressional direction was contained in the Conference Report (H.R. 
Rep. No. 106-379 at 91 (1999)) accompanying HUD's Fiscal Year (FY) 2000 
Appropriations Act (Pub. L. 106-74, approved October 20, 1999). 
Congress further directed that HUD make the results of the Cost Study 
available to the negotiated rulemaking committee and appropriate 
congressional committees.
    The Harvard GSD performed extensive research on the question of 
what the expense level of managing well-run public housing should be. 
HUD, consistent with Congressional direction, made the results of the 
Cost Study available to the members of the negotiated rulemaking 
committee who developed the current Operating Fund Program regulations, 
and also invited the committee members to be active participants in 
Harvard GSD's research for and development of the Cost Study. The 
Harvard GSD also conducted several public meetings to allow for an 
exchange of views and expectations with the public housing industry, 
beyond those industry members who were part of the negotiated 
rulemaking committee. The Cost Study was completed and officially 
released in July 2003.

II. The Negotiated Rulemaking Advisory Committee on the Operating Fund

    The FY 2004 Consolidated Appropriations Act (Pub. L. 108-199, 
approved January 23, 2004) required HUD to undertake negotiated 
rulemaking to make changes to the Operating Fund formula. Specifically, 
section 222 of the administrative provisions for the HUD appropriations 
provides for HUD to conduct negotiated rulemaking with representatives 
from interested parties for purposes of any changes to the Operating 
Fund, and that a final rule be issued no later than July 1, 2004.
    In response to this statutory language, HUD published a notice on 
January 28, 2004 (69 FR 4212), announcing its intent to establish an 
advisory committee to provide advice and recommendations on developing 
a rule for effectuating changes to the Operating Fund Program in 
response to the Harvard Cost Study. The January 28, 2004, notice 
solicited public comments on the proposed membership of the committee, 
and explained how persons could be nominated for membership. On March 
10, 2004 (69 FR 11349), HUD

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published a notice in the Federal Register announcing both the 
establishment of its negotiated rulemaking advisory committee on the 
Operating Fund (Committee) and the final list of Committee members.
    The Committee held four meetings. The meetings were held on March 
30-April 1, 2004 in Washington, DC, April 13-15, 2004, also in 
Washington, DC, May 11-12, 2004 in Atlanta, Georgia, and June 8-9, 
2004, in Potomac, Maryland. All of the Committee sessions were 
announced in the Federal Register and were open to the public. Members 
of the public were permitted to make statements during the meetings at 
designated times, and to file written statements with the Committee for 
its consideration.

III. Changes to Committee Recommendations

    This proposed rule is based primarily on the recommendations made 
by the Committee on ways to improve the current Operating Fund 
regulations. HUD developed a draft proposed rule based on those 
recommendations. Consistent with HUD's obligations under Executive 
Order 12866 (entitled ``Regulatory Planning and Review'') and other 
rulemaking authorities, the draft rule underwent further HUD and 
executive branch review prior to publication. As a result of those 
review processes, certain Committee recommendations have been revised. 
These changes have been made to better reflect a comparison with 
subsidized market-based units and Administration policies and budgetary 
priorities. HUD believes that these changes to the recommendations 
advance the goals of the Committee to implement an improved and more 
accurate Operating Fund formula.
    The overall proposed rule sets forth a formula that is comparable 
with subsidized market-based units; however, differences between public 
housing units and subsidized market-based units makes certain 
comparisons difficult. In acknowledgment of these difficulties, certain 
add-ons were included that went beyond the Harvard Cost Study 
recommendations and provide additional incentives in some cases (for 
example, the freezing of rental income for three years). With these 
changes, the proposed rule would provide PHAs more flexibility to 
augment the operating subsidy appropriations with additional revenue. 
In total, the Department believes the changes contained in the proposed 
rule and the flexibility provided is sufficient to provide for the 
operation and maintenance of public housing.
    This section of the preamble describes those situations where the 
recommendations submitted by the Committee have been revised, and the 
rationale for the changes.

A. Public Entity Fee

    The calculation of the Project Expense Level (PEL) would not 
include a $2 per unit month (PUM) public entity fee. The Committee 
recommended that a public entity fee of $2 PUM should be added to the 
initial PELs. After careful review of the proposal, it was determined 
that the expenses to be covered by the additional subsidy from this 
public entity fee were already adequately addressed through other means 
in the proposed rule.

B. Operating Subsidy for Vacant Units

    Under the proposed rule, PHAs would receive subsidy for occupied 
dwelling units and dwelling units with an approved vacancy. The 
Committee recommended that PHAs also receive operating subsidy for a 
limited number of vacancies if the annualized rate is less than or 
equal to three percent. It is true that there are special circumstances 
that may preclude PHAs from attaining full occupancy and, therefore, 
HUD will continue to pay subsidy for dwelling units meeting these 
circumstances (e.g., units undergoing modernization, special use units, 
etc). However, payment of subsidy for vacancies of up to three percent 
or for five units if the PHA has 100 or fewer units is contradictory to 
the goals of subsidized housing and asset management and comparability 
with subsidized market-based units. Accordingly, the proposed rule does 
not provide for such additional subsidy.

C. PEL Inflation Factor

    The annual inflation factor used to adjust the PEL would continue 
to be the applicable local inflation factor used to adjust the 
Allowable Expense Level (AEL) used under the current Operating Fund 
Program regulations. The Committee recommended that the inflation 
factor should be based on information published by the Department of 
Labor Bureau of Labor Statistics (BLS). The Committee further 
recommended that the adjustment factor should reflect a weight of 40 
percent for increases in cost of living as shown for such annual period 
by the BLS U.S. Cities Average All Items Consumer Price Index, and 60 
percent for increases in wages, salaries and benefits for an annualized 
period as shown in the BLS Employment Cost Index. The Committee based 
its recommendation on the fact that the BLS data is readily available 
to the public. Upon further consideration, the Department has concluded 
that the purpose of the inflation factor is better served by using the 
existing inflation factor. Retaining the current inflation factor will 
provide PHAs with continuity and an inflation factor that has 
adequately served to adjust the AEL for many years.
    The current inflation factor has a 60 percent wage and 40 percent 
non-wage structure in keeping with the Committee's recommendation. 
Additionally, the current inflation factor better reflects wages 
because it uses Bureau of Labor Statistics wage data generated from 
county level government wages, which is then averaged to the 
metropolitan and non-metropolitan level for each state. For the 40 
percent non-wage inflation factor, the current formula uses the 
Producer Price Index (PPI) instead of the Consumer Price Index (CPI). 
The PPI more accurately reflects the actual costs associated with the 
production of non-food and non-energy goods.

D. Nonprofit Ownership Coefficient

    The PEL for a given property consists of the sum of nine variable 
coefficients added to a formula constant. The exponent of that sum is 
then multiplied by a percentage, to reflect the nonprofit ownership of 
the property. This proposed rule provides for a nonprofit coefficient 
of four percent. The Committee recommended that the non-profit 
coefficient be ten percent. The Department believes that PHAs have 
strong characteristics of both profit and non-profit entities, and 
agrees with the Cost Study's inclusion of a coefficient. However, the 
ten percent differential between the costs associated with for-profit 
and non-profit entities also reflects inefficiencies that currently 
exist in the delivery of housing services that should not be supported 
in the formula. Accordingly, the coefficient has been reduced to 
account for these current inefficiencies.

E. Phase-In of Operating Subsidy Gains

    For PHAs that would experience a gain in their operating subsidy, 
the proposed rule provides that the gain will be phased in over a four-
year period. The Committee recommended that such increases be phased in 
over a two-year period. HUD recognizes that PHAs should receive the 
full benefit of increases to their operating subsidy allocation, but 
also believes that this period of time should be more closely aligned 
with the five-year phase in period for those PHAs that would have their 
subsidy decreased as a result of the proposed regulatory changes.

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F. Discontinuation of Subsidy Reduction Through Demonstration of 
Successful Conversion to Asset Management

    PHAs that experience a reduction in their operating subsidy will 
not be able to discontinue the reduction at the PHA's next subsidy 
calculation by demonstrating a successful conversion to asset 
management. The Committee recommended that HUD should discontinue 
subsidy reductions for a PHA that can demonstrate a successful 
conversion to asset management. It was concluded that the Cost Study 
methodology should be equally applied to all PHAs, and that providing 
for discontinuation of subsidy reductions would weaken implementation 
of the Cost Study. However, the proposed rule continues to phase in the 
reduction of subsidy over the five-year period and by the percentages 
recommended by the Committee. Further, in accordance with the Committee 
recommendations, the proposed rule allows PHAs to substitute 
independent cost data for use as a basis of subsidy funding through an 
appeals process.

G. Adjustment Based on Committee Recommendations for Certain PHAs

    The proposed rule would provide an ``add on'' for certain PHAs that 
would experience a reduction in its operating subsidy between the 
formula in the current Operating Fund Program regulations and the 
formula contained in the proposed rule. Specifically, if such a PHA 
would instead experience an operating subsidy increase if the four 
factors listed below were applied to the formula in the proposed rule, 
the PHA will receive an add on to its subsidy allocation. The 
Department recognizes that many PHAs, especially those that would have 
experienced an operating subsidy reduction, may have already begun 
initial conversion steps to asset management. The Department believes 
that a reduction in subsidy from the current regulations for those PHAs 
that were expecting to receive an increase in subsidy jeopardizes their 
timely and successful conversion to asset management. The amount of the 
add-on would be equal to the difference between the PHA's operating 
subsidy calculated under the formula in the proposed rule and the 
amount of the PHA's operating subsidy under the proposed rule with the 
application of the four factors listed below. The amount of the 
increased funding would be determined using FY 2004 data and would be 
subject to the transition policies and requirements contained in the 
proposed rule. The four factors used for purposes of this calculation 
reflect certain Committee recommendations that, as discussed above, 
were not adopted in the proposed rule. Specifically, the four factors 
would be: (1) A $2 PUM public entity fee; (2) a ten percent nonprofit 
coefficient; (3) payment of operating subsidy on a limited number of 
vacancies if the annualized rate is less than or equal to three 
percent; and (4) an annual inflation factor based on the most recent 
annual data published by the BLS.

H. Subsidy for Vacant Units

    PHAs that appeal to receive higher subsidy on vacant units due to 
changing market conditions would be required to submit, with their 
appeal, a plan to end the higher subsidy within two years. In addition, 
a PHA shall only be granted one such appeal and shall only receive the 
higher subsidy for a maximum period of two years. The Committee 
recommendations did not provide for the submission of a plan to end the 
higher subsidy, nor did the recommendations provide for a limit on the 
number of appeals or the term a PHA would be permitted receive this 
higher subsidy. HUD recognizes that when units are vacant due to 
changing market conditions, receipt of additional subsidy may be 
necessary. However, the Department believes that continuing to support 
vacant units is not sound fiscal policy and a two year period is a 
sufficient time in which to implement a plan to lease these vacant 
units.

I. Sanctions for Failure To Convert to Asset-Based Management

    The proposed rule provides that HUD shall impose sanctions as 
deemed necessary, and otherwise provided by law, for those PHAs that 
are not in compliance with asset management by FY2011. These sanctions 
may include the imposition of a daily monetary fine until the PHA 
converts to asset management. The Committee sessions did not make a 
recommendation regarding sanctions for PHAs not in compliance with 
asset management. HUD believes that such a provision is necessary to 
help ensure enforcement of the asset management requirements contained 
in the proposed rule.

IV. This Proposed Rule

    The proposed rule reflects the recommendations made by the 
Committee, with some modifications, on ways to improve and clarify the 
current regulations governing the Operating Fund Program, and takes 
into consideration the recommendations contained in the Cost Study. The 
most significant features of the proposed rule are described below.

A. Implementation of Cost Study

    The Committee used the Cost Study as the basis for developing the 
interim regulatory changes. For example, the proposed rule would 
implement the recommendation made by the Cost Study to replace the 
current factor known as the Allowable Expense Level (AEL) with a new 
Project Expense Level (PEL). The proposed rule also adopts the 
recommendation of the Cost Study to redirect the focus of the public 
housing program from an ``agency-centric'' to a ``property-based'' 
management model, as is the case generally with multifamily rental 
housing management.
    However, the Committee recognized that asset management reflects a 
significant change in the direction and methods employed by many PHAs 
and by HUD, and will require a longer implementation period because 
there are many aspects to this change. Such changes will include the 
creation of new goals, a conversion to project-based accounting, the 
establishment of a different operational approach, and the 
implementation of additional organizational and regulatory changes 
beyond those included in this rule. The regulatory changes made by this 
rule are a significant initial step in the direction of asset 
management.

B. Other Regulatory Goals

    In addition to implementing the recommendations of the Cost Study, 
the changes contained in this proposed rule improve and clarify the 
existing requirements for the Operating Fund Program. As more fully 
described below, the proposed rule: (1) Provides more explicit guidance 
on the expected outcomes contained in the operating subsidy formula; 
(2) streamlines and simplifies the operating subsidy calculation to 
determine appropriate subsidy amounts for each PHA by project and to 
distribute those correct amounts timely and accurately, to use 
effective administrative control of funds; to reduce reporting errors 
and facilitate more efficient and robust data collection; and (3) 
improves the operating subsidy estimation process by placing more 
emphasis on actual or historical data rather than on forecasted 
information.
    1. Streamlined calculation. The proposed rule re-organizes part 990 
to describe and simplify the operating subsidy calculation. The rule 
clearly defines the major components of the formula (such as the new 
Project Expense Level, Utilities Expense Level, Other Formula Expenses 
(Add-ons), and Formula Income) and notes the

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relationships of these various components.
    Consistent with the Committee's decision to streamline the 
operating subsidy calculation, the proposed rule would not codify 
certain secondary elements that will be used in the revised Operating 
Fund Formula. These elements include the coefficients used to adjust 
the variables for calculating the new PEL, the units of measurement and 
round-off conventions that will be used in the formula, and the 
determination of the geographic variable used in the PEL calculation. 
Regulatory codification of these formula elements would require the use 
of notice and comment rulemaking for future amendments and, thus, 
potentially delay HUD's ability to update the formula as new and more 
accurate data becomes available. After careful consideration, the 
Committee determined that these details should more appropriately be 
provided in non-codified guidance that may be more quickly revised, 
such as a Handbook, Federal Register notice, or other non-regulatory 
means. Following publication of the final rule for this proposed rule, 
HUD will issue guidance providing the information described above, as 
well as other guidance regarding the revised operating subsidy 
calculation.
    In furtherance of this goal, the Committee also elected to 
streamline regulatory text concerning statutory and other cross-cutting 
federal requirements that apply to the Operating Fund Program (for 
example, the environmental review procedures of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321) and the implementing 
regulations at 24 CFR parts 50 and 58 currently referenced at Sec.  
990.111). This regulatory streamlining would not reflect any change in 
the timing and applicability of the requirements of part 58 as 
currently described in Sec.  990.111(c), including the need to obtain 
approval of a request for release of funds, HUD environmental approval, 
or a responsible entity's determination of exemption before the funding 
of non-routine maintenance and capital expenditure activities may be 
incorporated into a PHA's initial operating budget and before the PHA 
may commit any funds to such activities. HUD will issue non-regulatory 
guidance providing further instructions on the applicability of these 
requirements.
    2. Increased focus on actual or historical data. The typical budget 
cycle results in an 18-month lag between the time HUD formulates the 
Operating Fund budget request and the actual budget year. In the past, 
HUD has based its budget request to Congress on forecasted information. 
The proposed rule seeks to provide more accurate reporting and improve 
HUD's ability to estimate budget requirements by relying more on 
historical data. For example, HUD will develop a PHA's formula income 
from a PHA's year-end financial information provided by the PHA through 
HUD's information systems.
    3. Funding period. In this proposed rule, a PHA's fiscal year-end 
is no longer tied to the formula and funding process. Under this 
proposed rule, HUD will run the formula and obligate funds for all PHAs 
at the same time during the fiscal year. This is a change from prior 
practice where HUD based the funding on a limited number of actual 
current year subsidy calculations submissions and estimates of the 
remaining outstanding subsidy calculations. This change will result in 
a one-time transition of obligating funds based on a PHA's fiscal year-
end to a calendar year. It is also HUD's intent to use the data, where 
available from its systems, to populate the formula and to eliminate 
duplicate data reporting.

C. New Information Systems

    As noted in this preamble and the proposed regulatory text, the 
changes to the Operating Fund Formula will require that PHAs maintain 
and report data not required under the current operating subsidy 
calculation process. Further, HUD will be required to update its 
automated information systems to accommodate the new data collections 
required by the rule. HUD has begun the process of updating its 
systems, and will notify each PHA when HUD has the automated systems 
capacity to receive the information required by the rule.

V. Overview of Revised Part 990

    The proposed rule re-organizes the regulations in 24 CFR part 990 
for purposes of clarity and to reflect the recommendations of the Cost 
Study. The proposed rule establishes ten subparts (A through J) in part 
990, with each subpart addressing a specific aspect of the Operating 
Fund. This section of the preamble summarizes the requirements of each 
subpart. Further guidance will be provided in a transition notice and 
through annual notices provided at the beginning of each funding cycle.

Subpart A--Purpose, Applicability, Operating Fund Formula, and 
Definitions

    Subpart A contains the definitions applicable to the Operating Fund 
and also describes the Operating Fund Formula along with its 
applicability to various HUD programs. The proposed rule revises the 
current regulations by removing the discussion of those provisions that 
pertain to the Virgin Islands, Puerto Rico, Guam, and Alaska PHAs. 
These PHAs had previously received operating subsidy funding outside of 
the Operating Fund formula but are now included within the formula.

Subpart B--Eligibility for Operating Subsidy; Computation of Eligible 
Unit Months

    Subpart B describes the requirements and procedures governing the 
computation of eligible unit months. A public housing unit may receive 
operating subsidy for each unit month that it qualifies as an occupied 
dwelling unit or a dwelling unit with an approved vacancy. The total 
number of eligible unit months for the PHA will be calculated from July 
1 to June 30 prior to the first day of the applicable funding period 
and will consist of eligible units as defined in this rule. The rule 
reserves to HUD the right to determine the status of any public housing 
unit based on information in HUD's information systems. In addition, 
the rule provides for a change in a PHA's formula within each one-year 
funding period based on the addition and deletion of units in a PHA's 
inventory.

Subpart C--Calculating Formula Expenses

    New subpart C describes how formula expenses will be calculated 
under the revised Operating Fund Formula. The rule provides a detailed 
description with respect to the computation of the PEL. The PEL 
replaces the existing AEL methodology pursuant to the recommendations 
contained in the Cost Study. As more fully detailed in the proposed 
regulatory text, the specific PEL for a given property consists of the 
sum of nine variable coefficients added to a formula constant. The 
exponent of that sum is then multiplied by a percentage, to reflect the 
nonprofit ownership of the property and an annual inflation factor is 
then applied to the resulting PEL. This nonprofit ownership adjustment 
is based on the conclusions contained in the Cost Study. The Cost Study 
found three basic property ownership types were available for 
benchmarking--nonprofit, for profit, and limited dividends. The Cost 
Study designated PHAs as nonprofit, upon concluding that this 
classification related closest to the ownership and operation of public 
housing properties.
    This subpart also describes the Utilities Expense Level (UEL), 
including the computation of the current

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consumption level and the rolling base consumption level. A PHA that 
undertakes energy conservation measures financed by an entity other 
than HUD may qualify under this rule for financial incentives with HUD 
approval. In addition, this subpart describes add-ons to the subsidy 
calculation (e.g., funding of resident participation activities, 
information technology, asset repositioning, and asset management).

Subpart D--Calculating Formula Income

    Subpart D describes the calculation of formula income, which will 
be derived from a PHA's year-end audited financial information 
contained in HUD's information systems. Formula income is an estimate 
of a PHA's non-operating subsidy revenue and is calculated by 
multiplying the per unit month (PUM) income amount by the eligible unit 
months (EUMs), as defined in the rule. The rule provides for different 
PHA fiscal year-ends within 2004. After a PHA's formula income is 
calculated, it will not be recalculated nor inflated for fiscal years 
2006 through 2008, unless a PHA can show a severe local economic 
hardship affecting its ability to maintain some aspect of its formula 
income. No later than FY 2008, HUD will analyze the effects of freezing 
formula income and, based on that analysis, determine whether to extend 
the applicability of this provision for future fiscal years or to 
modify the income component of the formula. HUD will issue this policy 
determination through handbook, Federal Register notice, or other non-
regulatory means, and offer the public an opportunity to comment before 
the policy determination takes effect.

Subpart E--Determination and Payment of Operating Subsidy

    Subpart E describes, among other things, the amount of operating 
subsidy for which a PHA is eligible, as well as the procedures HUD will 
follow to make operating subsidy payments to PHAs. Subpart E also 
addresses the fungibility of operating subsidy between projects. 
Specifically, the proposed rule provides that operating subsidy will 
remain fully fungible between Annual Contribution Contract (ACC) 
projects until operating subsidy is calculated by HUD at a project 
level. After subsidy is calculated at a project level, operating 
subsidy can only be transferred to another ACC project if a project's 
financial information reveals excess cash flow and only in the amount 
up to those excess cash flows. Under the rule, the PHA shall submit 
timely data to ensure accurate calculation under the formula. Failure 
to do so may result in sanctions. Also, if HUD determines that a PHA is 
not in compliance with all of the income reexamination requirements, 
HUD shall withhold payments to which the PHA may be entitled.

Subpart F--Transition Policy and Transition Funding

    Because of the elimination of AEL, the introduction of the PEL, and 
other formula differences, many PHAs will experience changes in the 
calculation of their operating subsidies. This subpart provides 
policies on such transitions.
    For PHAs that will experience a reduction in their operating 
subsidy calculated under the current regulations, such reductions will 
occur over a five year period. In the first year of the effect of this 
rule, the decrease will be limited to 24 percent of the difference 
between the two funding levels. The decrease will be limited to 43 
percent of the difference in the second year, 62 percent of the 
difference in the third year, and 81 percent of the difference in the 
fourth year. The full amount of the reduction in the operating subsidy 
shall be realized in the fifth year of the effect of this rule.
    For PHAs that will experience a subsidy increase in their operating 
subsidy, such increases will occur over a four year period. In the 
first year of the effect of this rule, the increase will be limited to 
20 percent of the difference between the two levels. The increase will 
be limited to 40 percent in the second year of effect of this rule, and 
60 percent in the third year. The full increase in subsidy will be 
realized in the fourth year of the effect of this rule.

Subpart G--Appeals

    Among other changes to the Operating Fund Formula, the revised 
formula procedures will involve new methods for determining formula 
expenses and require the asset-based management of PHA properties. 
Given the significant changes to the current Operating Fund Formula, 
the Committee determined that it would be appropriate to provide PHAs 
with the opportunity to appeal subsidy amounts under certain specified 
circumstances. These appeals procedures will assist PHAs to transition 
to the new methods for calculating operating subsidies, and help ensure 
that accurate data is used in the new formula calculations.
    Subpart G describes the different types of appeals available to 
PHAs, and the requirements applicable for each appeal. HUD will provide 
up to a two percent hold-back of Operating Fund appropriations for 
FY2006 and FY2007 to fund appeals that are filed during each of these 
two fiscal years. Hold-back funds not utilized will be added back to 
the formula within each of the affected fiscal years. Appeals are 
voluntary and must cover an entire portfolio, not single properties. 
However, the Assistant Secretary for Public and Indian Housing has the 
discretion to accept appeals of less than an entire portfolio for PHAs 
with greater than 5,000 units.

Subpart H--Asset Management

    This rule states that PHAs shall manage their properties according 
to an asset management model, consistent with management norms in the 
broader multifamily management industry. PHAs shall also implement 
project-based management, project-based budgeting, and project-based 
accounting, defined in the rule, which are essential components of 
asset management. The rule provides that PHAs that own and operate 250 
or more dwelling rental units are required to operate using an asset 
management model consistent with this subpart. PHAs that own and 
operate fewer than 250 dwelling rental units may treat their entire 
portfolio as a single project, but will not receive the add-on for the 
asset management fee. Similarly, PHAs with only one project will not be 
eligible for an asset management fee. The rule further provides that a 
PHA is considered in compliance with asset management requirements if 
it can demonstrate that it is managing substantially in accordance with 
this subpart H. This subpart also provides that HUD may impose 
sanctions for PHAs that are not in compliance with asset management by 
FY 2011.

Subpart I--Operating Subsidy for Properties Managed by Resident 
Management Corporations (RMCs)

    This subpart describes how the operating subsidy will be calculated 
for RMCs including direct-funded RMCs, and lists several factors that 
will affect the calculation of the subsidy, including changes in 
inflation, utility rates and consumption, and changes in the number of 
units in the resident management project. The rule indicates other 
factors and exclusions and inclusions that will affect the amounts to 
be provided a project managed by an RMC. Subpart I also contains 
detailed provisions regarding the preparation of an RMC's operating 
budget and the retention of excess revenues.

Subpart J--Financial Management Systems, Monitoring, and Reporting

    Subpart J describes requirements regarding financial management

[[Page 19863]]

systems, as well as on the monitoring of PHA program and financial 
performance. These requirements are mostly unchanged from the current 
regulatory provisions.

VI. Findings and Certifications

Information Collection Requirements

    The information collection requirements contained in this proposed 
rule have been approved by the Office of Management and Budget (OMB) 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and 
assigned OMB Control Numbers 2577-0026, 2577-0029, 2577-0066, and 2577-
0072. In accordance with the Paperwork Reduction Act, HUD may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless the collection displays a currently 
valid OMB control number

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
for this rule has been made in accordance with HUD regulations at 24 
CFR part 50, which implement section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.). The Finding 
of No Significant Impact is available for public inspection between 8 
a.m. and 5 p.m. weekdays in the Regulations Division, Office of the 
General Counsel, Department of Housing and Urban Development, Room 
10276, 451 Seventh Street, SW., Washington, DC 20410-5000.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The entities that would be subject to this rule are public housing 
agencies that administer public housing. Under the definition of 
``small governmental jurisdiction'' in section 601(5) of the RFA, the 
provisions of the RFA are applicable only to those public housing 
agencies that are part of a political jurisdiction with a population of 
under 50,000 persons. The number of entities potentially affected by 
this rule is therefore not substantial. Further, the proposed 
regulatory changes were developed using negotiated rulemaking 
procedures and with the active participation of PHAs that will be 
affected by the revised Operating Fund requirements. The membership of 
the negotiated rulemaking committee included representatives of smaller 
PHAs, who expressed the views and concerns of these PHAs during 
development of the proposed regulatory changes.
    Accordingly, the undersigned certifies that this rule will not have 
a significant economic impact on a substantial number of small 
entities. Notwithstanding HUD's determination that this rule will not 
have a significant effect on a substantial number of small entities, 
HUD specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the executive order. This rule does not have federalism 
implications and will not impose substantial direct compliance costs on 
state and local governments nor preempt state law within the meaning of 
the executive order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and on the private sector. This rule does not 
impose any federal mandates on any state, local, or tribal government, 
nor on the private sector, within the meaning of the UMRA.

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866 (``entitled Regulatory Planning and Review''). 
This rule was determined to be economically significant under E.O. 
12866. Any changes made to this proposed rule as a result of that 
review are identified in the docket file, which is available for public 
inspection between 8 a.m. and 5 p.m. weekdays in the Office of 
Legislation and Regulations, Office of the General Counsel, Room 10276, 
451 Seventh Street, SW., Washington, DC 20410-0500.
    The Economic Analysis prepared for this rule is also available for 
public inspection at the same location and on HUD's Web site at http://www.hud.gov. A summary of the findings contained in Economic Analysis 
follows.
    A. Rulemaking Goals and Focus of Economic Analysis. As noted above, 
the proposed regulatory changes contained in this proposed rule reflect 
the recommendations made by the Committee on ways to improve and 
clarify the current regulations governing the Operating Fund Program, 
and take into consideration the recommendations of the Cost Study on 
the cost of operating well-run public housing. The proposed rule would 
make some modifications to the Committee recommendations to more 
accurately compare the costs of operating public housing and subsidized 
market-based units, as well as to better reflect Administration 
policies and budgetary priorities. More specifically, the rule attempts 
to achieve three objectives:
    1. Provide more explicit guidance on the expected outcomes 
contained in the operating subsidy formula.
    2. Streamline and simplify the operating subsidy calculation to: 
(i) Determine appropriate subsidy amounts for each PHA by project; (ii) 
distribute those amounts in a timely and accurate manner; (iii) use 
effective administrative control of funds; and (iv) reduce reporting 
errors and facilitate more efficient and robust data collection.
    3. Improve the operating subsidy estimation process by placing more 
emphasis on actual or historical data rather than on forecasted 
information.
    The Economic Analysis discusses the economic impact of the 
implementation of the proposed rule.
    B. Basis for Economically Significant Determination Under E.O. 
12866. HUD determined that the proposed rule would be an economically 
significant rule under E.O. 12866 because the rule would results in 
transfers of funding levels to and among PHAs of more than $100 million 
a year.
    C. Findings. This Economic Analysis finds that, with more efficient 
transfers through better incentives, there will be a net increase in 
societal benefits. The net increase was not quantified. The Economic 
Analysis also finds that the full implementation cost of the proposed 
rule is approximately $74 million in 2003 dollars in increased 
operating subsidy eligibility. The transition funding provisions, which 
are intended to provide a transition period for PHAs with subsidy 
changes, would result in varying costs over a five year period when 
compared to the fully phased in subsidy change, which would occur in 
year 5 of rule implementation. The proposed rule would alter the flow

[[Page 19864]]

of transfers to PHAs, as such, would have a direct financial 
consequence on the federal budget and on individual PHAs and their 
tenants.
    The Economic Analysis concludes that the two immediate consequences 
of the proposed rule would be as follows:
    1. Using FY 2003 dollars and assuming funding at 100 percent of 
eligibility, public housing program funding eligibility for operating 
subsidies would increase by $83 million over the 5-year period and by 
about $74 million a year in 2003 dollars when fully implemented.
    2. Changes in operating subsidy allocations resulting from the 
proposed rule would be phased in over four years for PHAs having 
subsidy eligibility increases and over five years for those with 
subsidy eligibility decreases; thus the increase in Operating Fund 
eligibility and the change in distribution of funds will be less during 
the transition than in the full implementation of the proposed rule in 
the fifth year.

Congressional Review of Major Proposed Rules

    This rule is a ``major rule'' as defined in Chapter 8 of 5 U.S.C. 
At the final rule stage, the rule will be submitted for congressional 
review in accordance with this chapter.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance (CFDA) program number is 
14.850.

List of Subjects in 24 CFR Part 990

    Accounting, Grant programs-housing and community development, 
Public housing, Reporting and recordkeeping requirements.
    Accordingly, for the reasons stated in the preamble, HUD proposes 
to amend 24 CFR part 990 as follows:

PART 990--THE PUBLIC HOUSING OPERATING FUND PROGRAM

    1. Revise part 990 to read as follows:

PART 990--THE PUBLIC HOUSING OPERATING FUND PROGRAM

Subpart A--Purpose, Applicability, Formula, and Definitions
Sec.
990.100 Purpose.
990.105 Applicability.
990.110 Operating fund formula.
990.115 Definitions.
990.116 Environmental review requirements.
Subpart B--Eligibility for Operating Subsidy; Computation of Eligible 
Unit Months
990.120 Unit months.
990.125 Eligible units.
990.130 Ineligible units.
990.135 Eligible unit months (EUMs).
990.140 Occupied dwelling units.
990.145 Dwelling units with approved vacancies.
990.155 Addition and deletion of units.
Subpart C--Calculating Formula Expenses
990.160 Overview of calculating formula expenses.
990.165 Computation of project expense level (PEL).
990.170 Computation of utilities expense level (UEL): Overview.
990.175 Utilities expense level: Computation of the current 
consumption level.
990.180 Utilities expense level: Computation of the rolling base 
consumption level.
990.185 Utilities expense level: Incentives for energy conservation/
rate reduction.
990.190 Other formula expenses (add-ons).
Subpart D--Calculating Formula Income
990.195 Calculation of formula income.
Subpart E--Determination and Payment of Operating Subsidy
990.200 Determination of formula amount.
990.205 Fungibility of operating subsidy between projects.
990.210 Payment of operating subsidy.
990.215 Payments of operating subsidy conditioned upon reexamination 
of income of families in occupancy.
Subpart F--Transition Policy and Transition Funding
990.220 Purpose.
990.225 Transition determination.
990.230 PHAs that will experience a subsidy reduction.
990.235 PHAs that will experience a subsidy increase.
Subpart G--Appeals
990.240 General.
990.245 Types of appeals.
990.250 Requirements for certain appeals.
Subpart H--Asset Management
990.255 Overview.
990.260 Applicability.
990.265 Identification of projects.
990.270 Asset management.
990.275 Project-based management.
990.280 Project-based budgeting and accounting.
990.285 Records and reports.
990.290 Compliance with asset management requirements.
Subpart I--Operating Subsidy for Properties Managed by Resident 
Management Corporations (RMCs)
990.295 Resident Management Corporation operating subsidy.
990.300 Preparation of operating budget.
990.305 Retention of excess revenues.
Subpart J--Financial Management Systems, Monitoring, and Reporting
990.310 Purpose--General policy on financial management, monitoring, 
and reporting.
990.315 Submission and approval of operating budgets.
990.320 Audits.
990.325 Record retention requirements.

    Authority: 42 U.S.C. 1437g; 42 U.S.C. 3535(d).

Subpart A--Purpose, Applicability, Formula, and Definitions


Sec.  990.100  Purpose.

    This part implements section 9(f) of the United States Housing Act 
of 1937 (1937 Act), (42 U.S.C. 1437g). Section 9(f) establishes an 
Operating Fund for the purposes of making assistance available to 
public housing agencies (PHAs) for the operation and management of 
public housing. In the case of unsubsidized housing, the total expenses 
of operating rental housing should be covered by the operating income, 
which primarily consists of rental income and, to some degree, 
investment and non-rental income. In the case of public housing, the 
Operating Fund provides a subsidy to assist PHAs to serve low, very 
low, and extremely low-income families. This part describes the 
policies and procedures for Operating Fund formula calculations and 
management under the Operating Fund Program.


Sec.  990.105  Applicability.

    (a) Applicability of this part. (1) With the exception of subpart I 
of this part, this part is applicable to all PHA rental units under an 
Annual Contributions Contract (ACC). This includes PHAs that have not 
received Operating Fund payments previously, but are eligible for such 
payments under the Operating Fund Formula.
    (2) This part is applicable to all rental units managed by a 
resident management corporation (RMC), including a direct-funded RMC.
    (b) Inapplicability of this part. (1) This part is not applicable 
to Indian Housing, section 5(h) and section 32 homeownership projects, 
the Housing Choice Voucher Program, the section 23 Leased Housing 
Program, or the section 8 Housing Assistance Payments Programs.
    (2) With the exception of subpart J of this part, this part is not 
applicable to the Mutual Help Program or the Turnkey III Homeownership 
Opportunity Program.


Sec.  990.110  Operating fund formula.

    (a) General formula. (1) The amount of annual contributions 
(operating

[[Page 19865]]

subsidy) each PHA is eligible to receive under this part shall be 
determined by a formula.
    (2) In general, operating subsidy shall be the difference between 
formula expense and formula income. If a PHA's formula expense is 
greater than its formula income, then the PHA is eligible for an 
operating subsidy.
    (3) Formula expense is an estimate of a PHA's operating expense and 
is determined by the following three components: Project Expense Level 
(PEL), Utility Expense Level (UEL), and other formula expenses (add-
ons). Formula expense and its three components are further described in 
subpart C of this part. Formula income is an estimate for a PHA's non-
operating subsidy revenue and is further described in subpart D of this 
part.
    (4) Certain portions of the operating fund formula (e.g., PEL) are 
calculated in terms of per unit month (PUM) amounts and are converted 
into whole dollars by multiplying the PUM amount by the number of 
eligible unit months (EUMs). EUMs are further described in subpart B of 
this part.
    (b) Specific formula. (1) A PHA's Operating Fund amount shall be 
the sum of the three formula expense components calculated as follows: 
[(PEL multiplied by EUM) plus (UEL multiplied by EUM) plus add-ons] 
minus formula income multiplied by EUM.
    (2) A PHA whose formula amount is equal to or less than zero is 
still eligible to receive Operating Fund equal to its most recent 
actual audit cost.
    (3) Operating Fund will be limited to the availability of funds as 
described in Sec.  990.210(c).
    (c) Non-codified formula elements. This part defines the major 
components of the Operating Fund Formula and describes the 
relationships of these various components. However, this part does not 
codify certain secondary elements that will be used in the revised 
Operating Fund Formula. HUD will more appropriately provide this 
information in non-codified guidance, such as a Handbook, Federal 
Register notice, or other non-regulatory means that HUD determines 
appropriate.


Sec.  990.115  Definitions.

    The following definitions apply to the Operating Fund program:
    1937 Act means the United States Housing Act of 1937 (42 U.S.C. 
1437 et seq.)
    Annual contribution contract (ACC) is a contract in the form 
prescribed by HUD for loans and contributions, which may be in the form 
of operating subsidy whereby HUD agrees to provide financial assistance 
and the PHA agrees to comply with HUD requirements for the development 
and operation of its public housing projects.
    Asset management is a management model that emphasizes property 
management as well as long term and strategic planning.
    Current consumption level is the amount of each utility consumed at 
a project during the one-year period that ended the June 30th prior to 
the beginning of the applicable funding period.
    Eligible unit months (EUM) are the actual number of PHA units in 
eligible categories expressed in months for a specified time frame and 
for which a PHA receives operating subsidy.
    Formula amount is the amount of operating subsidy a PHA is eligible 
to receive, expressed in whole dollars, as determined by the Operating 
Fund Formula.
    Formula expense is an estimate of a PHA's operating expense used in 
the Operating Fund Formula.
    Formula income is an estimate of a PHA's non-operating subsidy 
revenue used in the Operating Fund Formula.
    Funding period is the calendar year for which HUD will distribute 
the Operating Fund according to the Operating Fund Formula.
    Operating fund is the account/program authorized by section 9 of 
the 1937 Act for making assistance available to PHAs for the operation 
and managements of public housing.
    Operating fund formula (Formula) means the data and calculations 
used under this part to determine a PHA's amount of the operating 
subsidy for a given period.
    Operating subsidy is the amount of annual contributions for 
operations a PHA receives each funding period under section 9 of the 
1937 Act as determined by the Operating Fund Formula in this part.
    Other operating costs (add-ons) means PHA expenses that are 
recognized as formula expenses but are not included either in the 
project expense level or in the utility expense level.
    Payable consumption level is the amount for all utilities consumed 
at a project that the Formula recognizes in the computation of a PHA's 
utility expense level at that project.
    Per unit month (PUM) is an expression of Project Expense Level, 
Utility Expense Level and formula income. It describes a cost or an 
amount on a monthly basis per unit.
    Project means each PHA project under an ACC to which the Operating 
Fund Formula is applicable. However, for purposes of asset management, 
as described in subpart H of this part, projects may be as identified 
under the ACC or may be a reasonable grouping of projects or portions 
of a project or projects under the ACC.
    Project-based management is the provision of property management 
services that are tailored to the unique needs of each property, given 
the resources available to that property.
    Project expense level (PEL) is the amount of estimated expenses for 
each project (excluding utilities and add-ons) expressed as a per unit 
per month cost.
    Project units means all dwelling units in all of a PHA's projects 
under an ACC.
    Rolling base consumption level (RBCL) is the average of the yearly 
consumption levels for the 36-month period ending 18 months prior to 
the beginning of the applicable funding period.
    Transition funding is the timing and amount by which a PHA will 
realize increases and reductions in operating subsidy based on the new 
funding levels of the Operating Fund Formula.
    Unit months are the total number of project units in a PHA's 
inventory expressed in months for a specified time frame.
    Utilities means electricity, gas, heating fuel, water, and sewerage 
service.
    Utilities expense level (UEL) is a product of the utility rate 
multiplied by the payable consumption level multiplied by the utilities 
inflation factor expressed as a per unit month dollar amount.
    Utility rate (rate) means the actual average rate for any given 
utility for the latest 12 months that ended the June 30th prior to the 
beginning of the applicable funding period.
    Yearly consumption level is the actual amount of each utility 
consumed at a project during a one-year period ending June 30.


Sec.  990.116  Environmental review requirements.

    The environmental review procedures of the National Environmental 
Policy Act of 1969 (42 U.S.C. 4332(2)(C)) and the implementing 
regulations at 24 CFR parts 50 and 58 are applicable to the Operating 
Fund Program.

Subpart B--Eligibility for Operating Subsidy; Computation of 
Eligible Unit Months


Sec.  990.120  Unit months.

    (a) Some of the components of HUD's Operating Fund Formula are 
based on a measure known as unit months. Unit months represent a PHA's 
public

[[Page 19866]]

housing inventory during a specified period of time. The unit months 
eligible for operating subsidy in a one-year period are equal to the 
number of months that the units are in an operating subsidy eligible 
category, adjusted for changes in inventory (e.g., units added or 
removed), as described below.
    (b) A PHA is eligible to receive operating subsidy for a unit on 
the date it is both placed under the ACC and occupied. The date a unit 
is eligible for operating subsidy does not change the Date of Full 
Availability (DOFA) or the date of the End of Initial Operating Period 
(EIOP), nor does this provision place a project into management status.


Sec.  990.125  Eligible units.

    A PHA is eligible to receive operating subsidy for public housing 
units under an ACC for:
    (a) Occupied dwelling units as defined in Sec.  990.140; and
    (b) A dwelling unit with an approved vacancy (as defined in Sec.  
990.145).


Sec.  990.130  Ineligible units.

    (a) Vacant units that do not fall within the definition of Sec.  
990.145 are not eligible for operating subsidy.
    (b) Units that are eligible to receive an asset repositioning fee, 
as described in Sec.  990.190(h), are not eligible to receive operating 
subsidy under this subpart.


Sec.  990.135  Eligible unit months (EUMs).

    (a) A PHA's total number of eligible unit months will be calculated 
for the 12-month period from July 1 to June 30 that is prior to the 
first day of the applicable funding period, and will consist of 
eligible units as defined in Sec.  990.140 and Sec.  990.145.
    (b)(1) The determination of whether a public housing unit satisfies 
the requirements of Sec.  990.140 or Sec.  990.145 for any unit month 
shall be based on the unit's status as of either the first or last day 
of the month, as determined by the PHA.
    (2) HUD reserves the right to determine the status of any and all 
public housing units based on information in its information systems.
    (c) The PHA shall maintain and, at HUD's request, shall make 
available to HUD, specific documentation of the status of all units, 
including, but not limited to, a listing of the units, street addresses 
or physical address, and project/management control numbers.
    (d) Any unit months that do not meet the requirements of this 
subpart are not eligible for, and will not be subsidized by, the 
Operating Fund.


Sec.  990.140  Occupied dwelling units.

    A PHA is eligible to receive operating subsidy for public housing 
units for each unit month they are under an ACC and occupied by a 
public housing eligible family under lease.


Sec.  990.145  Dwelling units with approved vacancies.

    (a) A PHA is eligible to receive operating subsidy for vacant 
public housing units for each unit month they are under ACC and meet 
one of the following HUD-approved vacancies:
    (1) Units undergoing modernization. Vacancies resulting from 
project modernization or unit modernization (such as work necessary to 
reoccupy vacant units) provided that one of the following conditions is 
met:
    (i) The unit is undergoing modernization (i.e., the modernization 
contract has been awarded or force accounting has started) and must be 
vacant to perform the work, and the construction is on schedule 
according to a HUD-approved PHA Annual Plan; or
    (ii) The unit must be vacant to perform the work and the treatment 
of the vacant unit is included in a HUD-approved PHA Annual Plan, but 
the time period for placing the vacant unit under construction has not 
yet expired. The PHA shall place the vacant unit under construction 
within two federal fiscal years (FFYs) after the FFY in which the 
capital funds are approved.
    (2) Special use units. Units approved and used for resident 
services, resident organization offices and related activities such as 
self-sufficiency and anti-crime initiatives.
    (b) On a project-by-project basis, subject to prior HUD approval 
and for the time period agreed to by HUD, a PHA shall receive operating 
subsidy for the units affected by the following events that are outside 
the control of the PHA:
    (1) Litigation. Units that are vacant due to litigation, such as a 
court order or settlement agreement that is legally enforceable; units 
that are vacant in order to meet regulatory and statutory requirements 
to avoid potential litigation (as covered in a HUD-approved PHA Annual 
Plan); and units under voluntary compliance agreements with HUD or 
other voluntary compliance agreements acceptable to HUD (e.g., units 
that are being held vacant as part of a court-order, HUD-approved 
desegregation plan, or voluntary compliance agreement requiring 
modifications to the units to make them accessible pursuant to 24 CFR 
part 8).
    (2) Disasters. Units that are vacant due to a federally declared, 
state-declared, or other declared disaster.
    (3) Casualty losses. Damaged units that remain vacant due to delays 
in settling insurance claims.
    (c) A PHA may appeal to HUD to receive operating subsidy for units 
that are vacant due to changing market conditions (see subpart G of 
this part--Appeals).


Sec.  990.155  Addition and deletion of units.

    (a) Changes in public housing unit inventory. To generate a change 
to its formula amount within each one-year funding period, PHA shall 
periodically (e.g., quarterly) report the following information to HUD, 
during the funding period:
    (1) New units that were added to the ACC, and occupied by a public 
housing-eligible family during the prior reporting period for the one-
year funding period, but have not been included in the previous 
eligible unit months' data; and
    (2) Projects, or entire buildings in a project, that are eligible 
to receive an asset repositioning fee in accordance with the provisions 
in Sec.  990.190(h).
    (b) Revised eligible unit month calculation. (1) For new units, the 
revised calculation shall assume that all such units will be fully 
occupied for the balance of that funding period. The actual occupancy/
vacancy status of these units will be included to calculate the PHA's 
operating subsidy in the subsequent funding period after these units 
have one full year of a reporting cycle.
    (2) Projects, or entire buildings in a project, that are eligible 
to receive an asset repositioning fee in accordance with Sec.  
990.175(h) are not to be included in the calculation of eligible unit 
months. Funding for these units is provided under the conditions 
described in Sec.  990.190(h).

Subpart C--Calculating Formula Expenses


Sec.  990.160  Overview of calculating formula expenses.

    (a) General. Formula expenses represent the costs of services and 
materials needed by a well-run PHA to sustain the project. These costs 
include items such as administration, maintenance, and utilities. HUD 
also determines a PHA's formula expenses at a project level. HUD uses 
the following three factors to determine the overall formula expense 
level for each project:
    (1) The project expense level (PEL) (calculated in accordance with 
Sec.  990.165);

[[Page 19867]]

    (2) The utilities expense level (UEL) (calculated in accordance 
with Sec. Sec.  990.170, 990.175, 990.180, and 990.185); and
    (3) Other formula expenses (add-ons) (calculated in accordance with 
Sec.  990.190).
    (b) PEL, UEL, and add-ons. Each project of a PHA has a unique PEL 
and UEL. The PEL for each project is based on ten characteristics and 
certain adjustments described in Sec.  990.165. The PEL represents the 
normal expenses of operating public housing projects, such as 
maintenance and administration costs. The UEL for each project 
represents utility expenses. Utility expense levels are based on an 
incentive system aimed at reducing utility expenses. Both the PEL and 
UEL are expressed in PUM costs. The expenses not included in these 
expense levels and unique to PHAs are titled other formula expenses 
(add-ons) and are expressed in a yearly dollar amount.
    (c) Calculating project formula expense. The formula expense of any 
one project is the sum of the project's PEL and the UEL, multiplied by 
the total eligible unit months specific to the project, plus the add-
ons.


Sec.  990.165  Computation of project expense level (PEL).

    (a) Computation of PEL. The PEL is calculated in terms of PUM cost 
and represents the costs associated with the project except for utility 
and add-on costs. Costs associated with the PEL are administration, 
management fees, maintenance, protective services, leasing, occupancy, 
staffing, and other expenses such as project insurance. HUD will 
calculate the PEL using regression analysis and benchmarking for the 
actual costs of Federal Housing Administration (FHA) projects to 
estimate costs for public housing projects. HUD will use the ten 
variables described in paragraph (b) of this section and their 
associated coefficient (i.e., values that are expressed in percentage 
terms) to produce a PEL.
    (b) Variables. The ten variables are:
    (1) Size of project (number of units);
    (2) Age of property (Date of Full Availability (DOFA));
    (3) Bedroom mix;
    (4) Building type;
    (5) Occupancy type (family or senior);
    (6) Location (an indicator of the type of community in which a 
property is located; location types include rural, city central 
metropolitan, and non-city central metropolitan (suburban) areas);
    (7) Neighborhood poverty rate;
    (8) Percent of households assisted;
    (9) Ownership type (profit, non-profit, or limited dividend); and
    (10) Geographic.
    (c) Cost adjustments. HUD will apply five adjustments to the PEL. 
The adjustments are:
    (1) Application of a $200 floor for any senior property and a $215 
floor for any family property;
    (2) Application of a $420 ceiling for any property except for New 
York City Housing Authority projects, which have a $480 ceiling;
    (3) Application of a four percent reduction for any PEL calculated 
over $325, with the reduction limited to $325; and
    (4) The reduction of audit costs as reported for FFY 2003 PUM 
amount.
    (d) Annual inflation factor. The PEL for each project shall be 
adjusted annually, beginning in 2005, by the local inflation factor. 
The local inflation factor shall be the HUD-determined weighted average 
percentage increase in local government wages and salaries for the area 
in which the PHA is located and non-wage expenses.
    (e) Calculating a PEL. To calculate a specific PEL for a given 
property, the sum of the nine variables' coefficients (all variables 
except ownership type) shall be added to a formula constant. The 
exponent of that sum shall be multiplied by a percentage to reflect the 
non-profit ownership type, which will produce an unadjusted PEL. For 
the calculation of the initial PEL, the out of model cost adjustments 
described in paragraphs (c)(1), (c)(2), and (c)(3) of this section will 
be applied. After these initial adjustments are applied, the audit 
adjustment will be applied to arrive at the PEL in year 2000 dollars. 
After the PEL in year 2000 dollars is created, the annual inflation 
factor as described in paragraph (d) of this section will be applied 
cumulatively to this number through 2004 to yield an initial PEL in 
terms of current dollars.
    (f) Calculation of the PEL for Moving to Work PHAs. PHAs 
participating in the Moving to Work (MTW) Demonstration authorized 
under section 204 of the Omnibus Consolidated Rescissions and 
Appropriations Act of 1996 (Public Law 104-134, approved April 26, 
1996) shall receive an operating subsidy as provided in Attachment A of 
their MTW Agreements executed prior to the effective date of this rule. 
PHAs with an MTW Agreement will continue to have the right to request 
extensions of or modifications to their MTW Agreements.
    (g) Calculation of the PELs for mixed finance developments. If, 
prior to [insert effective date of final rule], a PHA has either a 
mixed-finance arrangement that has closed or has filed documents in 
accordance with 24 CFR 941.606 for a mixed finance transaction, then 
the project covered by the mixed finance transaction will receive 
funding based on the higher of its former Allowable Expense Level or 
the new computed PEL.
    (h) Calculation of PELs when data are inadequate or unavailable. 
When sufficient data are unavailable for the calculation of a PEL, HUD 
may calculate a PEL using an alternative methodology. The 
characteristics may be used from similarly situated properties.
    (i) Review of PEL methodology by advisory committee. In 2009, HUD 
will convene a meeting with representation of appropriate stakeholders, 
to review the methodology to evaluate the PEL based on actual cost 
data. The meeting shall be convened in accordance with the Federal 
Advisory Committee Act (5 U.S.C. Appendix) (FACA) or such other 
authority or protocol determined appropriate. HUD may determine 
appropriate funding levels for each project to be effective in FY 2011 
after following appropriate rulemaking procedures.


Sec.  990.170  Computation of utilities expense level (UEL): Overview.

    (a) General. The UEL for each PHA is based on its consumption for 
each utility, the applicable rates for each utility, and an applicable 
inflation factor. The UEL for a given funding period is the product of 
the utility rate multiplied by the payable consumption level multiplied 
by the inflation factor. The UEL is expressed in terms of PUM costs.
    (b) Utility rate. The utility rate for each type of utility will be 
the actual average rate from the latest 12 months that ended June 30. 
The rate will be calculated by dividing the actual utility cost by the 
actual utility consumption, with consideration for pass-through costs 
(e.g., state and local utility taxes, tariffs) for the respective time 
periods.
    (c) Payable consumption level. The payable consumption level is 
based on the current consumption level adjusted by a utility 
consumption incentive. The incentive shall be computed by comparing 
current consumption levels of each utility to the rolling base 
consumption level. If the comparison reflects a decrease in the 
consumption of a utility, the PHA shall retain 75 percent of this 
decrease. Alternately, if the comparison reflects an increase in the 
consumption of a utility, the PHA shall absorb 75 percent of this 
increase.
    (d) Inflation factor for utilities. The UEL shall be adjusted 
annually by an inflation/deflation factor based upon the fuels and 
utilities component of the

[[Page 19868]]

United States Department of Labor, Bureau of Labor Statistics (BLS) 
Consumer Price Index for All Urban Consumers (CPI-U). The annual 
adjustment to the UEL shall reflect the most recently published and 
localized data available from BLS at the time the annual adjustment is 
calculated.
    (e) Increases in tenant utility allowances. Increases in tenant 
utility allowances, as a component of the formula income, as described 
in Sec.  990.195(b), shall result in a commensurate increase of 
operating subsidy. Decreases in such utility allowances shall result in 
a commensurate decrease in operating subsidy.
    (f) Records and reporting. (1) Appropriate utility records, 
satisfactory to HUD, shall be developed and maintained, so that 
consumption and rate data can be determined.
    (2) All records shall be kept by utility and by project for each 
twelve-month period ending June 30.
    (3) HUD will notify each PHA when HUD has the automated systems 
capacity to receive such information. Each PHA then will be obligated 
to provide consumption and cost data to HUD for all utilities for each 
project.
    (4) If a PHA has not maintained or cannot recapture utility data 
from its records for a particular utility, the PHA shall compute the 
UEL by:
    (i) Using actual consumption data for the last complete year(s) of 
available data or data of comparable project(s) that have comparable 
utility delivery systems and occupancy, in accordance with a method 
prescribed by HUD; or
    (ii) Requesting field office approval to use actual PUM utility 
expenses for its UEL in accordance with a method prescribed by HUD when 
the PHA cannot obtain necessary data to calculate the UEL in accordance 
with paragraph (f)(4)(i) of this section.


Sec.  990.175  Utilities expense level: Computation of the current 
consumption level.

    The current consumption level shall be the actual amount of each 
utility consumed during the one-year period ending June 30 that is six 
months prior to the first day of the applicable funding period.


Sec.  990.180  Utilities expense level: Computation of the rolling base 
consumption level.

    (a) General. (1) The rolling base consumption level (RBCL) shall be 
equal to the average of yearly consumption levels for the 36-month 
period ending 18 months prior to the first day of the applicable 
funding period.
    (2) The yearly consumption level is the actual amount of each 
utility consumed during a one-year period ending June 30. For example, 
for the funding period January 1, 2006 through December 31, 2006, the 
RBCL will be the average of the following yearly consumption levels:

Year 1 = July 1, 2001 through June 30, 2002
Year 2 = July 1, 2002 through July 30, 2003
Year 3 = July 1, 2003 through June 30, 2004

    Note: In this example, the current year's consumption level will 
be July 1, 2004 through June 30, 2005.

    (b) Distortions to rolling base consumption level. The PHA shall 
have its RBCL determined so as not to distort the rolling base period 
in accordance with a method prescribed by HUD if:
    (1) A project has not been in operation during at least 12 months 
of the rolling base period,
    (2) A project enters or exits management after the rolling base 
period and prior to the end of the applicable funding period, or
    (3) A project has experienced a conversion from one energy source 
to another, switched from PHA-supplied to resident-purchased utilities 
during or after the rolling base period, or for any other reason that 
would cause the RBCL not to be comparable to the current year's 
consumption level.
    (c) Financial incentives. The three-year rolling base for all 
relevant utilities will be adjusted to reflect any financial incentives 
to the PHA to reduce consumption as described in Sec.  990.185.


Sec.  990.185  Utilities expense level: Incentives for energy 
conservation/rate reduction.

    (a) General/consumption reduction. If a PHA undertakes energy 
conservation measures that are financed by an entity other than HUD, 
the PHA may qualify for the incentives available under this section. 
The measures may include, but are not limited to, physical improvements 
financed by a loan from a bank, utility or governmental entity, 
management of costs under a performance contract, or a shared savings 
agreement with a private energy service company. For a PHA to qualify 
for these incentives, the PHA must obtain HUD approval. Approval shall 
be based upon a determination that payments under the contract can be 
funded from the reasonably anticipated energy cost savings. The 
contract period shall not exceed 12 years.
    (1) Frozen rolling base. (i) If a PHA undertakes energy 
conservation measures that are approved by HUD, the RBCL for the 
project and the utilities involved may be frozen during the contract 
period. Before the RBCL is frozen, it must be adjusted to reflect any 
energy savings resulting from the use of any HUD funding. The RCBL also 
may be adjusted to reflect systems repaired to meet applicable building 
and safety codes as well as to reflect adjustments for occupancy rates 
increased by rehabilitation. The RBCL shall be frozen at the level 
calculated for the year during which the conservation measures 
initially shall be implemented.
    (ii) The PHA operating fund eligibility shall reflect the retention 
of 100 percent of the savings from decreased consumption until the term 
of the financing agreement is complete. The PHA must use at least 75 
percent of the cost savings to pay off the debt, e.g., pay off the 
contractor or bank loan. If less than 75 percent of the cost savings is 
used for debt payment, however, HUD shall retain the difference between 
the actual percentage of cost savings used to pay off the debt and 75 
percent of the cost savings. If at least 75 percent of the cost savings 
is paid to the contractor, the PHA may use the full amount of the 
remaining cost savings for any eligible operating expense.
    (iii) The annual three-year rolling base procedures for computing 
the RBCL shall be reactivated after the PHA satisfies the conditions of 
the contract. The three years of consumption data to be used in 
calculating the RBCL after the end of the contract period shall be the 
yearly consumption levels for the final three years of the contract.
    (2) PHAs undertaking energy conservation measures that are financed 
by an entity other than HUD may include resident-paid utilities under 
the consumption reduction incentive, using the following methodology:
    (i) The PHA reviews and updates all utility allowances to ascertain 
that residents are receiving the proper allowances before energy 
savings measures are begun;
    (ii) The PHA makes future calculations of rental income for 
purposes of the calculation of operating subsidy eligibility based on 
these baseline allowances. In effect, HUD will freeze the baseline 
allowances for the duration of the contract;
    (iii) After implementation of the energy conservation measures, the 
PHA updates the utility allowances in accordance with provisions in 24 
CFR part 965, subpart E. The new allowance should be lower than 
baseline allowances;
    (iv) The PHA uses at least 75 percent of the savings for paying the 
cost of the

[[Page 19869]]

improvement (the PHA will be permitted to retain 100 percent of the 
difference between the baseline allowances and revised allowances);
    (v) After the completion of the contract period, the PHA begins 
using the revised allowances in calculating its operating subsidy 
eligibility; and,
    (vi) The PHA may exclude from its calculation of rental income the 
increased rental income due to the difference between the baseline 
allowances and the revised allowances of the projects involved, for the 
duration of the contract period.
    (3) Subsidy add-on. (i) If a PHA qualifies for this incentive, 
i.e., the subsidy add-on, in accordance with the provisions of 
paragraph (a) of this section, then the PHA is eligible for additional 
operating subsidy each year of the contract to amortize the cost of the 
loan for the energy conservation measures during the term of the 
contract subject to the provisions of this paragraph (b)(3) of this 
section . The PHA's operating subsidy for the current funding year will 
continue to be calculated in accordance with paragraphs (a), (b) and 
(c) of Sec.  990.170 (i.e., the rolling base is not frozen). The PHA 
will be able to retain part of the cost savings in accordance with 
Sec.  990.170(c).
    (ii) The actual cost of energy (of the type affected by the energy 
conservation measure) after implementation of the energy conservation 
measure will be subtracted from the expected energy cost, to produce 
the energy cost savings for the year.
    (iii) If the cost savings for any year during the contract period 
is less than the amount of operating subsidy to be made available under 
this paragraph to pay for the energy conservation measure in that year, 
the deficiency will be offset against the PHA's operating subsidy 
eligibility for the PHA's next fiscal year.
    (iv) If energy cost savings are less than the amount necessary to 
meet amortization payments specified in a contract, the contract term 
may be extended (up to the 12-year limit) if HUD determines that the 
shortfall is the result of changed circumstances rather than a 
miscalculation or misrepresentation of projected energy savings by the 
contractor or PHA. The contract term may only be extended to 
accommodate payment to the contractor and associated direct costs.
    (b) Rate reduction. If a PHA takes action beyond normal public 
participation in rate-making proceedings, such as well-head purchase of 
natural gas, administrative appeals or legal action to reduce the rate 
it pays for utilities, then the PHA will be permitted to retain one-
half the annual savings realized from these actions.
    (c) Utility benchmarking. HUD will pursue benchmarking utility 
consumption at the project level as part of the transition to asset 
management. HUD intends to establish benchmarks by collecting utility 
consumption and cost information on a project-by-project basis. In 
2009, after conducting a feasibility study, HUD will convene a meeting 
with representation of appropriate stakeholders to review utility 
benchmarking options so that HUD may determine whether or how to 
implement utility benchmarking to be effective in FY2011. The meeting 
shall be convened in accordance with the Federal Advisory Committee Act 
(5 U.S.C. Appendix) (FACA) or such other authority or protocol 
determined appropriate. The HUD study shall take into account typical 
levels of utilities consumption at public housing developments based 
upon factors such as building and unit type and size, temperature 
zones, age and construction of building, and other relevant factors.


Sec.  990.190  Other formula expenses (add-ons).

    In addition to calculating operating subsidy based on the PEL and 
UEL, a PHA's eligible formula expenses shall be increased by add-ons. 
The allowed add-ons are:
    (a) Self-sufficiency. A PHA may request operating subsidy for the 
reasonable cost of program coordinator(s) and associated costs in 
accordance with HUD's self-sufficiency program regulations and notices.
    (b) Energy loan amortization. A PHA may qualify for operating 
subsidy for payments of principal and interest cost for energy 
conservation measures described in Sec.  990.185(a)(3).
    (c) Payments in lieu of taxes (PILOT). Each PHA will receive an 
amount for PILOT in accordance with section 6(d) of the 1937 Act, based 
on its cooperation agreement or its latest actual PILOT payment.
    (d) Cost of independent audits. A PHA is eligible to receive 
operating subsidy equal to its most recent actual audit costs of the 
Operating Fund when an audit is required by the Single Audit Act (31 
U.S.C. 7501-7507) (see 24 CFR part 85) or when a PHA elects to prepare 
and submit such an audit to HUD. For the purpose of this rule, the most 
recent actual audit costs include the associated costs of an audit for 
the Operating Fund program only. A PHA whose operating subsidy is 
determined to be zero based on the Formula is still eligible to receive 
operating subsidy equal to its most recent actual audit costs. The most 
recent actual audit costs are used as a proxy to cover the cost of the 
next audit. If a PHA does not have a recent actual audit cost, the PHA 
working with HUD may establish an audit cost. A PHA that requests 
funding for an audit shall complete an audit. The results of the audit 
shall be transmitted in a time and manner prescribed by HUD.
    (e) Funding for resident participation activities. Each PHA's 
operating subsidy calculation shall include $25 per occupied unit per 
year for resident participation activities, including, but not limited 
to, those described in 24 CFR part 964. For purposes of this section, a 
unit is eligible to receive resident participation funding if it is 
occupied by a public housing resident or it is occupied by a PHA 
employee, a police officer, or other security personnel who is not 
otherwise eligible for public housing. In any fiscal year, if 
appropriations are not sufficient to meet all funding requirements 
under this part, then the resident participation component of the 
formula will be adjusted accordingly.
    (f) Asset management fee. Each PHA with at least 250 units shall 
receive a $4 PUM asset management fee. PHAs with fewer than 250 units 
that elect to transition to asset management shall receive an asset 
management fee of $2 PUM. PHAs with fewer than 250 units that elect to 
have their entire portfolio treated and considered as a single project 
as described in Sec.  990.260(b) or PHAs with only one project will not 
be eligible for an asset management fee. For all PHAs eligible to 
receive the asset management fee, the fee will be based on the total 
number of ACC units. PHAs that are not in compliance with asset 
management as described in subpart H of this part by FY2011 will 
forfeit this fee.
    (g) Information technology fee. Each PHA's operating subsidy 
calculation shall include $2 PUM for costs attributable to information 
technology. For all PHAs, this fee will be based on the total number of 
ACC units.
    (h) Asset repositioning fee. (1) A PHA that transitions projects or 
entire buildings of a project out of its inventory is eligible for an 
asset repositioning fee. This fee supplements the costs associated with 
administration and management of demolition or disposition, tenant 
relocation, and minimum protection and service associated with such 
efforts. The asset repositioning fee is not intended for individual 
units within a multi-unit building undergoing similar activities.
    (2) Projects covered by applications approved for demolition or 
disposition

[[Page 19870]]

shall be eligible for an asset repositioning fee on the first day of 
the next quarter six months after the date the first unit becomes 
vacant after the relocation date included in the approved relocation 
plan. When this condition is met, the project and all associated units 
are no longer considered an eligible unit month as described in Sec.  
990.155. Each PHA is responsible for accurately applying and 
maintaining supporting documentation on the start date of this 
transition period or is subject to forfeiture of this add-on.
    (3) Units categorized for demolition and which are eligible for an 
asset repositioning fee are eligible for operating subsidy at the rate 
of 75 percent PEL per unit for the first twelve months, 50 percent PEL 
per unit for the next twelve months, and 25 percent PEL per unit for 
the next twelve months.
    (4) Units categorized for disposition and which are eligible for an 
asset repositioning fee are eligible for operating subsidy at the rate 
of 75 percent PEL per unit for the first twelve months and 50 percent 
PEL per unit for the next twelve months.

    Example: A PHA has HUD's approval to demolish (or dispose of) a 
100-unit project from its 1,000 EUM inventory. On January 12, in 
conjunction with the PHA's approved Relocation Plan, a unit in that 
project becomes vacant. Accordingly, the demolition/disposition-
approved project is eligible for an asset repositioning fee on 
October 1. (This date is calculated as follows: January 12 + six 
months = July 12. The first day of the next quarter is October 1.)

    Although payment of the asset repositioning fee will not begin 
until October 1, the PHA will receive its full operating subsidy based 
on the 1,000 EUMs through September 30. On October 1 the PHA will begin 
its 3-year phase down of operating subsidy in accordance with paragraph 
(h) (3) of this section for the 100 units approved for demolition. 
(Phase down requirements for projects approved for disposition are 
found in paragraph (h)(4) of this section.) On October 1, the PHA's 
EUMs will be 900.
    (i) Adjustment for certain PHAs. A PHA that will experience a 
reduction in its operating subsidy between calculations using the 
formula in effect prior to [insert effective date of final rule] and 
the formula in this part, but would experience an increase in its 
operating subsidy between calculations using the formula in effect 
prior to [insert effective date of final rule] and the formula in this 
part with application of the four factors listed in paragraphs (i)(1) 
through (i)(4) of this section, will receive an add on to its subsidy. 
The amount of the add-on will be equal to the difference between the 
PHA's operating subsidy calculated under the formula in this part and 
the amount of the PHA's operating subsidy calculated by applying the 
four factors to the formula in this part. The amount of the add-on will 
be determined using FY 2004 data and will be subject to the transition 
policies and requirements contained in Sec.  990.235 of subpart F of 
this part. The four factors that will be used for purposes of this 
calculation are:
    (1) A $2 PUM public entity fee;
    (2) A ten percent nonprofit coefficient;
    (3) Payment of operating subsidy on a limited number of vacancies 
if the annualized rate is less than or equal to three percent or for 
five units if the PHA has 100 or fewer units; and
    (4) An annual inflation factor based on the most recent annual data 
published by the Department of Labor Bureau of Labor Statistics (BLS) 
for the lowest geographic area with statistically valid data at the 
time the annual inflation adjustment is calculated. The adjustment will 
reflect a weight of:
    (i) 40 percent for increases in cost of living as shown for such 
annual period by the BLS U.S. Cities Average All Items Consumer Price 
Index; and
    (ii) 60 percent for increases in wages, salaries and benefits for 
an annualized period as shown in the BLS Employment Cost Index, which 
annual adjustment shall reflect the most recently published annual data 
and the lowest geographic area with statistically valid data available 
from BLS at the time the annual inflation adjustment is calculated.
    (j) Costs attributable to changes in federal law, regulation or 
economy. In the event that HUD determines that enactment of a federal 
law or revision in HUD or other federal regulations has caused or will 
cause a significant change in expenditures of a continuing nature above 
the PEL and UEL, HUD may, in HUD's sole discretion, decide to prescribe 
a procedure under which the PHA may apply for or may receive an 
adjustment in operating subsidy.

Subpart D--Calculating Formula Income


Sec.  990.195  Calculation of formula income.

    (a) General. Formula income will be derived from a PHA's year-end 
financial information. The financial information used in the formula 
income computation will be the audited information provided by the PHA 
through HUD's information systems. The information will be calculated 
using the following PHA fiscal year-end information: April 1, 2003 
through March 31, 2004, July 1, 2003 through June 30, 2004, October 1, 
2003 through September 30, 2004, and January 1, 2004 through December 
31, 2004. For the purpose of the Operating Fund Formula, formula income 
is equal to the amount of rent charged to tenants divided by the 
respective unit months leased, and is therefore expressed in terms of 
PUM.
    (b) Calculation of formula income. To calculate formula income in 
whole dollars, the PUM amount will be multiplied by the EUMs as 
described in subpart B of this part.
    (c) Frozen at 2004 level. After a PHA's formula income is 
calculated as described in paragraph (a) of this section, it will not 
be recalculated or inflated for fiscal years 2006 through 2008, unless 
a PHA can show a severe local economic hardship that is impacting the 
PHA's ability to maintain some semblance of its formula income (see 
subpart G of this part--Appeals). A PHA's formula income may be 
recalculated if the PHA appeals to HUD for an adjustment in its 
formula.
    (d) Calculation of formula income when data are inadequate or 
unavailable. When audited data are unavailable in HUD's information 
systems for the calculation of formula income, HUD may use an 
alternative methodology, including, but not limited to, certifications, 
hard copy reports, and communications with the respective PHAs.
    (e) Inapplicability of 24 CFR 85.25. Formula income is not subject 
to the provisions regarding program income in 24 CFR 85.25.

Subpart E--Determination and Payment of Operating Subsidy


Sec.  990.200  Determination of formula amount.

    (a) General. The amount of operating subsidy that a PHA is eligible 
for is the difference between its formula expenses (as calculated under 
subpart C of this part) and its formula income (as calculated under 
subpart D of this part).
    (b) Use of HUD databases to calculate formula amount. HUD shall 
utilize its databases to make the Formula calculations. HUD's databases 
are intended to be employed to provide information on all primary 
factors in determining the operating subsidy amount. Each PHA is 
responsible for supplying accurate information on the status of each of 
its units in HUD's databases.
    (c) PHA responsibility to submit timely data. PHAs shall submit 
data used in the Formula on a regular and timely basis to ensure 
accurate

[[Page 19871]]

calculation under the Formula. If a PHA fails to provide accurate data, 
HUD will make a determination as to the PHA's inventory, occupancy, and 
financial information using available or verified data, which may 
result in a lower operating subsidy. HUD has the right to adjust any or 
all formula amounts based on clerical, mathematical, and informational 
system errors that affect any of the data elements used in the 
calculation of the Formula.
    (d) HUD shall impose sanctions as deemed necessary, and otherwise 
provided by law, for those PHAs that do not report accurate and timely 
data, as required under this section.


Sec.  990.205  Fungibility of operating subsidy between projects.

    (a) General. Operating subsidy shall remain fully fungible between 
ACC projects until operating subsidy is calculated by HUD at a project 
level. After subsidy is calculated at a project level, operating 
subsidy can be transferred as the PHA determines during the PHA's 
fiscal year to another ACC project(s) if a project's financial 
information, as described more fully in Sec.  990.280, produces excess 
cash flow, and only in the amount up to those excess cash flows.
    (b) Notwithstanding the provisions of paragraph (a) of this section 
and subject to all of the other provisions of this part, the New York 
City Housing Authority's Development Grant Project Amendment Number 
180, dated July 13, 1995, to Consolidated Annual Contributions Contract 
NY-333 remains in effect.


Sec.  990.210  Payment of operating subsidy.

    (a) Payments of operating subsidy under the Formula. HUD shall make 
monthly payments equal to \1/12\ of a PHA's total annual operating 
subsidy under the Formula by electronic funds transfers through HUD's 
automated disbursement system. HUD shall establish thresholds that 
permit PHAs to request monthly installments. PHA requests that exceed 
these thresholds will be subject to HUD review. HUD approvals of 
requests that exceed these thresholds are limited to PHAs that have an 
unanticipated and immediate need for disbursement.
    (b) Payments procedure. In the event that the amount of operating 
subsidy has not been determined by HUD as of the beginning of the 
funding period, operating subsidy shall be provided monthly, quarterly, 
or annually based upon the amount of the PHA's previous year's formula 
or such other amount as HUD may determine to be appropriate.
    (c) Availability of funds. In the event that insufficient funds are 
available, HUD shall have discretion to revise, on a pro rata basis, 
the amounts of operating subsidy to be paid to PHAs.


Sec.  990.215  Payments of operating subsidy conditioned upon 
reexamination of income of families in occupancy.

    (a) General. Each PHA is required to reexamine the income of each 
family in accordance with the provisions of the ACC, the 1937 Act, and 
HUD regulations. Income reexaminations shall be performed annually, 
except as provided in the 1937 Act, in HUD regulations, or in the MTW 
agreements. A PHA must be in compliance with all reexamination 
requirements in order to be eligible to receive full operating subsidy. 
A PHA's calculations of rent and utility allowances shall be accurate 
and timely.
    (b) A PHA in compliance. A PHA shall submit a certification that it 
is in compliance with the annual income reexamination requirements and 
that rents and utility allowance calculations have been or will be 
adjusted in accordance with current HUD requirements and regulations.
    (c) A PHA not in compliance. Any PHA not in compliance with annual 
income reexamination requirements at the time of the submission of the 
calculation of operating subsidy shall furnish to the responsible HUD 
field office a copy of the procedures it is using to achieve compliance 
and a statement of the number of families that have undergone 
reexamination during the twelve months preceding the current funding 
cycle. If, on the basis of this submission or any other information, 
HUD determines that the PHA is not substantially in compliance with all 
of the annual income reexamination requirements, HUD shall withhold 
payments to which the PHA may be entitled under this part. Payment may 
be withheld in an amount equal to HUD's estimate of the loss of rental 
income to the PHA resulting from its failure to comply with the 
requirements.

Subpart F--Transition Policy and Transition Funding


Sec.  990.220  Purpose.

    This policy is aimed at assisting all PHAs in transitioning to the 
new funding levels as determined by the formula set forth in this rule. 
PHAs will be subject to a transition funding policy that will either 
increase or reduce their total operating subsidy for a given year.


Sec.  990.225  Transition determination.

    The determination of the amount and period of the transition 
funding shall be based on the difference in subsidy levels between the 
formula set forth in this part and the formula in effect prior to 
[insert effective date of final rule]. The difference will be 
calculated using FY 2004 data. When actual data are not available for 
one of the formula components needed to calculate the Operating Fund 
formula of this rule for FY 2004, HUD will use alternate data as a 
substitute (e.g., unit months available for eligible unit months, 
phase-down funding for asset repositioning fee, etc.) If the difference 
between these formulas indicates that a PHA shall have its operating 
subsidy reduced as a result of this Formula, the PHA will be subject to 
a transition policy as indicated in Sec.  990.230. If the difference 
between these formulas indicates that a PHA will have its operating 
subsidy increased as a result of this Formula, the PHA will be subject 
to the transition policy as indicated in Sec.  990.235.


Sec.  990.230  PHAs that will experience a subsidy reduction.

    (a) For PHAs that will experience a reduction in their operating 
subsidy, as determined in Sec.  990.225, such reductions will have a 
limit of:
    (1) 24 percent of the difference between the two funding levels in 
the first year following [insert effective date of final rule];
    (2) 43 percent of the difference between the two funding levels in 
the second year following [insert effective date of final rule];
    (3) 62 percent of the difference between the two levels in the 
third year following [insert effective date of final rule]; and
    (4) 81 percent of the difference between the two levels in the 
fourth year following [insert effective date of final rule].
    (b) The full amount of the reduction in the operating subsidy level 
shall be realized in the fifth year following [insert effective date of 
final rule].
    (c) For example, a PHA has a subsidy reduction from $1,000,000 
under the formula in effect prior to [insert effective date of final 
rule] to $900,000 under the formula used for operating subsidy under 
this part using FY 2004 data. The difference would be calculated at 
$100,000 ($1,000,000-$900,000 = $100,000). In the first year, the 
subsidy reduction would be limited to $24,000, (24 percent of the 
difference). Thus, in this example the PHA will receive an operating 
subsidy amount of this rule plus a transition funding amount of $76,000 
(the $100,000 difference between the two subsidy amounts minus the 
$24,000 reduction limit).

[[Page 19872]]

    (d) The schedule for a PHA whose subsidy would be reduced is 
reflected in the table below.

------------------------------------------------------------------------
              Funding period                    Reduction limited to
------------------------------------------------------------------------
Year 1....................................  24 percent of the
                                             difference.
Year 2....................................  43 percent of the
                                             difference.
Year 3....................................  62 percent of the
                                             difference.
Year 4....................................  81 percent of the
                                             difference.
Year 5....................................  Full reduction reached.
------------------------------------------------------------------------

Sec.  990.235  PHAs that will experience a subsidy increase.

    (a) For PHAs that will experience a gain in their operating 
subsidy, as determined in Sec.  990.225, such increases will have a 
limit of:
    (1) 20 percent of the difference between the two funding levels in 
the first year following [insert effective date of final rule];
    (2) 40 percent of the difference between the two funding levels in 
the second year following [insert effective date of final rule]; and
    (3) 60 percent of the difference between the two funding levels in 
the third year following [insert effective date of final rule].
    (b) The full amount of the increase in the operating subsidy level 
shall be realized in the fourth year following [insert effective date 
of final rule].
    (c) For example, a PHA's subsidy increased from $900,000 under the 
formula in effect prior to [insert effective date of final rule] to 
$1,000,000 under the formula used to calculate operating subsidy under 
this part using FY 2004 data. The difference would be calculated at 
$100,000 ($1,000,000--$900,000 = $100,000). In the first year, the 
subsidy increase would be limited to $20,000 (20 percent of the 
difference). Thus, in this example the PHA will receive the PEL-derived 
subsidy amount of this rule minus a transition funding amount of 
$80,000 (the $100,000 difference between the two subsidy amounts minus 
the $20,000 transition amount).
    (d) The schedule for a PHA whose subsidy would be increased is 
reflected in the table below.

------------------------------------------------------------------------
              Funding period                     Increase limited to
------------------------------------------------------------------------
Year 1....................................  20 percent of the
                                             difference.
Year 2....................................  40 percent of the
                                             difference.
Year 3....................................  60 percent of the
                                             difference.
Year 4....................................  Full increase reached.
------------------------------------------------------------------------

Subpart G--Appeals


Sec.  990.240  General.

    (a) PHAs will be provided opportunities for appeals. HUD will 
provide up to a two percent hold-back of the Operating Fund 
appropriation for FY 2006 and FY 2007. HUD will use the hold-back 
amount to fund appeals that are filed during each of these fiscal 
years. Hold-back funds not utilized will be added back to the formula 
within each of the affected fiscal years.
    (b) Appeals are voluntary and must cover an entire portfolio, not 
single projects. However, the Assistant Secretary for Public and Indian 
Housing (or designee) has the discretion to accept appeals of less than 
an entire portfolio for PHAs with greater than 5,000 public housing 
units.


Sec.  990.245  Types of appeals.

    (a) Streamlined Appeal. This appeal would demonstrate that the 
application of a specific Operating Fund formula component has a 
blatant and objective flaw.
    (b) Appeal of Formula Income for Economic Hardship. After a PHA's 
formula income has been frozen, the PHA can appeal to have its formula 
income adjusted to reflect a severe local economic hardship that is 
impacting the PHA's ability to maintain rental and other revenue.
    (c) Appeal for specific local conditions. This appeal would be 
based on demonstrations that the model's predictions are not reliable 
because of specific local conditions. To be eligible, the affected PHA 
must demonstrate a variance of ten percent or greater in its PEL.
    (d) Appeal for changing market conditions. A PHA may appeal to 
receive operating subsidy for vacant units due to changing market 
conditions, after a PHA has taken aggressive marketing and outreach 
measures to rent these units. For example, a PHA that is located in an 
area experiencing population loss or economic dislocations that faces a 
lack of demand for housing in the foreseeable future. A PHA's appeal 
must contain a plan to end the higher subsidy within two years. This 
exemption shall only be granted one time and for a maximum term of two 
years.
    (e) Appeal to substitute actual project cost data. A PHA may appeal 
its PEL if it can produce actual project cost data derived from actual 
asset management, as outlined in subpart H of this part, for a period 
of at least two years.


Sec.  990.250  Requirements for certain appeals.

    (a) Appeals under Sec.  990.245(a) and (c) must be submitted once 
annually. Appeals under Sec.  990.245(a) and (c) must be submitted for 
new projects entering a PHA's inventory within one year of the 
applicable DOFA.
    (b) Appeals under Sec.  990.245(c) and (e) are subject to the 
following requirements:
    (1) The PHA is required to acquire an independent cost assessment 
of its projects;
    (2) The cost of services for the independent cost assessment is to 
be paid by the appellant PHA;
    (3) The assessment is to be reviewed by a professional familiar 
with property management practices and costs in the region or state in 
which the appealing PHA is located. This professional is to be procured 
by HUD. The professional review and recommendation will then be 
forwarded to the Assistant Secretary for Public and Indian Housing or 
his designee for final determination; and
    (4) If the appeal is granted, the PHA agrees to be bound to the 
independent cost assessment regardless of new funding levels.

Subpart H--Asset Management


Sec.  990.255  Overview.

    (a) PHAs shall manage their properties according to an asset 
management model, consistent with the management norms in the broader 
multi-family management industry. PHAs shall also implement project-
based management, project-based budgeting, and project-based 
accounting, which are essential components of asset management. The 
goals of asset management are to:
    (1) Improve the operational efficiency and effectiveness of 
managing public housing assets;
    (2) Better preserve and protect each asset;
    (3) Provide appropriate mechanisms for monitoring performance at 
the property level; and
    (4) Facilitate future investment and reinvestment in public housing 
by public and private sector entities.
    (b) HUD recognizes that appropriate changes in its regulatory and 
monitoring programs will be needed to support PHAs to undertake the 
goals identified in paragraph (a) of this section.


Sec.  990.260  Applicability.

    (a) PHAs that own and operate 250 or more dwelling rental units 
under title I of the 1937 Act, including units managed by a third party 
entity (for example, a resident management corporation) but excluding 
section 8 units, are required to operate using an asset management 
model consistent with this subpart.
    (b) PHAs that own and operate fewer than 250 dwelling rental units 
may treat their entire portfolio as a single project. However, if a PHA 
selects this option,

[[Page 19873]]

it will not receive the add-on for the asset management fee described 
in Sec.  990.190(f).


Sec.  990.265  Identification of projects.

    For purposes of this subpart, project means a public housing 
building or set of buildings grouped for the purpose of management. A 
project may be as identified under the ACC or may be a reasonable 
grouping of projects or portions of a project under the ACC. HUD shall 
retain the right to disapprove of a PHA's designation of a project. 
PHAs may group up to 250 scattered-site dwelling rental units into a 
single project.


Sec.  990.270  Asset management.

    As owners, PHAs have asset management responsibilities that are 
above and beyond property management activities. These responsibilities 
include decision-making on topics such as long-term capital planning 
and allocation, the setting of ceiling or flat rents, review of 
financial information and physical stock, property management 
performance, long-term viability of properties, property repositioning 
and replacement strategies, risk management responsibilities pertaining 
to regulatory compliance, and those otherwise consistent with the PHA's 
ACC responsibilities, as appropriate.


Sec.  990.275  Project-based management.

    Project-based management (PBM) is the provision of property-based 
management services that are tailored to the unique needs of each 
property, given the resources available to that property. These 
property management services include, but are not limited to, 
marketing, leasing, resident services, routine and preventive 
maintenance, lease enforcement, protective services, and other tasks 
associated with the day-to-day operation of rental housing at the 
project level. Under PBM, these property management services are 
arranged, coordinated, or overseen by management personnel who have 
been assigned responsibility for the day-to-day operation of that 
property and who are charged with direct oversight of operations of 
that property. Property management services may be arranged or provided 
centrally; however, in those cases in which property management 
services are arranged or provided centrally, the arrangement or 
provision of these services must be done in the best interests of the 
property, considering such factors as cost and responsiveness.


Sec.  990.280  Project-based budgeting and accounting.

    (a) All PHAs covered by this subpart shall develop and maintain a 
system of budgeting and accounting for each project in a manner that 
allows for analysis of the actual revenues and expenses associated with 
each property. Project-based budgeting and accounting will be applied 
to all programs and revenue sources that support projects under an ACC 
(e.g., the Operating Fund, the Capital Fund, etc.).
    (b)(1) Financial information to be budgeted and accounted for at a 
project level shall include all data needed to complete project-based 
financial statements in accordance with Accounting Principles Generally 
Accepted in the United States of America (GAAP), including revenues, 
expenses, assets, liabilities, and equity data. The PHA shall also 
maintain all records to support those financial transactions. At the 
time of conversion to project-based accounting, a PHA shall apportion 
its assets, liabilities, and equity to its respective projects and HUD-
accepted central office cost centers.
    (2) Provided that the PHA complies with GAAP and other associated 
laws and regulations pertaining to financial management (i.e., OMB 
Circulars), it shall have the maximum amount of responsibility and 
flexibility in implementing project-based accounting.
    (3) Project-specific operating income shall include, but is not 
limited to, such items as project-specific operating subsidy, dwelling 
and non-dwelling rental income, excess utilities income, and other PHA 
or HUD-identified income that is project-specific for management 
purposes.
    (4) Project-specific formula expenses shall include, but are not 
limited to, direct administrative costs, utilities costs, maintenance 
costs, tenant services, protective services, general expenses, non-
routine or capital expenses, and other PHA or HUD-identified costs 
which are project-specific for management purposes. Project-specific 
operating costs shall also include a property-management fee charged to 
each project that is used to fund operations of the central office. 
Amounts that can be charged to each project for the property-management 
fee must be reasonable. If the PHA contracts with a private management 
company to manage a project, the PHA may use the difference between the 
property management fee paid to the private management company and the 
fee that is reasonable to fund operations of the central office and 
other eligible purposes.
    (5) If the project has excess cash flow available after meeting all 
reasonable operating needs of the property, the PHA may use this excess 
cash flow for the following purposes:
    (i) Fungibility between projects as provided for in Sec.  990.205.
    (ii) Charging each project a reasonable asset-management fee that 
may also be used to fund operations of the central office. However, 
this asset-management fee may only be charged if the PHA performs all 
asset management activities described in this subpart (including 
project-based management, budgeting and accounting). Asset management 
fees are considered a direct expense.
    (iii) Other eligible purposes.
    (c) In addition to project-specific records, PHAs may establish 
central office cost centers to account for non-project specific costs 
(e.g., human resources, Executive Director's office, etc). These costs 
shall be funded from the property-management fees received from each 
property, and from the asset-management fees to the extent these are 
available.
    (d) In the case where a PHA chooses to centralize functions that 
directly support a project (e.g., central maintenance), it must charge 
each project using a fee-for-service approach. Each project shall be 
charged for the actual services received and only to the extent that 
such amounts are reasonable.


Sec.  990.285  Records and reports.

    (a) Each PHA shall maintain project-based budgets and fiscal year-
end financial statements prepared in accordance with GAAP and shall 
make these budgets and financial statements available for review upon 
request by interested members of the public.
    (b) Each PHA shall distribute the project-based budgets and year-
end financial statements to the Chairman and to each member of the PHA 
Board of Commissioners, and to such other state and local public 
officials as HUD may specify.
    (c) Some or all of the project-based budgets and financial 
statements and information shall be required to be submitted to HUD in 
a manner and time prescribed by HUD.


Sec.  990.290  Compliance with asset management requirements.

    (a) A PHA is considered in compliance with asset management 
requirements if it can demonstrate substantially, as described in 
paragraph (b) below, that it is managing according to this subpart.
    (b) Demonstration of compliance with asset management will be based 
on an independent assessment.

[[Page 19874]]

    (1) The assessment is to be conducted by a professional familiar 
with property management practices and costs in the region or state in 
which the PHA is located. This professional is to be procured by HUD.
    (2) The professional review and recommendation will then be 
forwarded to the Assistant Secretary or his designee for final 
determination of compliance to asset management.
    (c) Upon HUD's determination of successful compliance with asset 
management, PHAs will then be funded based on this information pursuant 
to Sec.  990.165(i).
    (d) PHAs must be in compliance with the project-based accounting 
and budgeting requirements in this subpart by FY 2007. PHAs must be in 
compliance with the remainder of the components of asset management by 
FY 2011.
    (e) HUD may impose sanctions as deemed necessary, and otherwise 
provided by law, for those PHAs that are not in compliance with asset 
management by FY 2011. These sanctions may include the imposition of a 
daily monetary fine until the PHA converts to asset management.

Subpart I--Operating Subsidy for Properties Managed by Resident 
Management Corporations (RMCs)


Sec.  990.295  Resident Management Corporation operating subsidy.

    (a) General. This part applies to all projects managed by a 
Resident Management Corporation (RMC); including a direct funded RMC.
    (b) Operating subsidy. Subject to paragraphs (c) and (d) of this 
section, the amount of operating funds that a PHA or HUD provides a 
project managed by an RMC shall not be reduced during the three-year 
period beginning on the date the RMC first assumes management 
responsibility for the project.
    (c) Change factors. The operating subsidy for an RMC managed 
project shall reflect changes in inflation, utility rates and 
consumption, and changes in the number of units in the resident 
management project.
    (d) Exclusion of increased income. Any increased income directly 
generated by activities by the RMC or facilities operated by the RMC 
shall be excluded from the calculation of the operating subsidy.
    (e) Exclusion of technical assistance. Any technical assistance the 
PHA provides to the RMC will not be included for purposes of 
determining the amount of funds provided to a project under paragraph 
(b) of this section.
    (f) The following conditions may not affect the amounts to be 
provided under this part to a project managed by an RMC:
    (1) Income reduction. Any reduction in the subsidy or total income 
of a PHA that occurs as a result of fraud, waste, or mismanagement by 
the PHA; and
    (2) Change in total income. Any change in the total income of a PHA 
that occurs as a result of project-specific characteristics when these 
characteristics are not shared by the project managed by the RMC.
    (g) Other project income. In addition to the operating subsidy 
calculated in accordance with this part and the amount of income 
derived from the project (from sources such as rents and charges), the 
management contract between the PHA and the RMC may specify that income 
be provided to the project from other legally available sources of PHA 
income.


Sec.  990.300  Preparation of operating budget.

    (a) The RMC and the PHA must each submit a separate operating 
budget to HUD for approval, including the calculation of operating 
subsidy eligibility in accordance with Sec.  990.200 for the project 
managed by an RMC. The budget will reflect all project expenditures and 
will identify the expenditures related to the responsibilities of the 
RMC and the expenditures that are related to the functions that the PHA 
will continue to perform.
    (b) For each project or part of a project that is operating in 
accordance with the ACC amendment relating to this subpart and in 
accordance with a contract vesting maintenance responsibilities in the 
RMC, the PHA will transfer into a sub-account of the operating reserve 
of the PHA an operating reserve for the RMC project. When all 
maintenance responsibilities for a resident-managed project are the 
responsibility of the RMC, the amount of the reserve made available to 
a project under this subpart will be the per unit cost amount available 
to the PHA operating reserve, excluding all inventories, prepaids and 
receivables at the end of the PHA fiscal year preceding implementation, 
multiplied by the number of units in the project operated. When some, 
but not all, maintenance responsibilities are vested in the RMC, the 
management contract between the PHA and RMC may provide for an 
appropriately reduced portion of the operating reserve to be 
transferred into the RMC's sub-account.
    (c) The RMC's use of the operating reserve is subject to all 
administrative procedures applicable to the conventionally owned public 
housing program. Any expenditure of funds from the reserve must be for 
eligible expenditures that are incorporated into an operating budget 
subject to approval by HUD.
    (d) Investment of funds held in the reserve will be in accordance 
with HUD regulations and guidance.


Sec.  990.305  Retention of excess revenues.

    (a) Any income generated by an RMC that exceeds the income 
estimated for the income categories specified in the RMC's management 
contract must be excluded in subsequent years in calculating:
    (1) The operating subsidy provided to a PHA under this part; and
    (2) The funds the PHA provides to the RMC.
    (b) The management contract must specify the amount of income that 
is expected to be derived from the project (from sources such as rents 
and charges) and the amount of income to be provided to the project 
from the other sources of income of the PHA (such as operating subsidy 
under this part, interest income, administrative fees, and rents). 
These income estimates must be calculated consistent with HUD's 
administrative instructions. Income estimates may provide for 
adjustment of anticipated project income between the RMC and the PHA, 
based upon the management and other project-associated responsibilities 
(if any) that are to be retained by the PHA under the management 
contract.
    (c) Any revenues retained by an RMC under this section may only be 
used for purposes of improving the maintenance and operation of the 
project, establishing business enterprises that employ residents of 
public housing, or acquiring additional dwelling units for lower income 
families. Units acquired by the RMC will not be eligible for payment of 
operating subsidy.

Subpart J--Financial Management Systems, Monitoring, and Reporting


Sec.  990.310  Purpose--General policy on financial management, 
monitoring and reporting.

    All PHA financial management systems, reporting and monitoring on 
program performance and financial reporting shall be in compliance with 
the requirements of 24 CFR 85.20, 85.40 and 85.41. Certain HUD 
requirements provide exceptions for additional specialized procedures 
that are determined by HUD to be necessary for the proper management of 
the program in accordance with the requirements of the 1937 Act and the 
ACC between each PHA and HUD.

[[Page 19875]]

Sec.  990.315  Submission and approval of operating budgets.

    Required documentation:
    (a) Prior to the beginning of its fiscal year, a PHA shall prepare 
an operating budget in a manner prescribed by HUD. The PHA's Board of 
Commissioners shall review and approve the budget by resolution. Each 
fiscal year, the PHA shall submit to HUD, in a time and manner 
prescribed by HUD, the approved Board resolution.
    (b) HUD may direct the PHA to submit its complete operating budget 
with detailed supporting information and the Board resolution if the 
PHA has breached the ACC contract, or for other reasons, which, in 
HUD's determination, threaten the PHA's future serviceability, 
efficiency, economy, or stability. When the PHA no longer is operating 
in a manner that threatens the future serviceability, efficiency, 
economy, or stability of the housing it operates, HUD will notify the 
PHA that it no longer is required to submit a complete operating budget 
with detailed supporting information to HUD for review and approval.
    (c) If HUD finds that an operating budget is incomplete, 
inaccurate, includes illegal or ineligible expenditures, mathematical 
errors, errors in the application of accounting procedures, or is 
otherwise unacceptable, HUD may, at any time, require the PHA to submit 
more or revised information regarding the budget or revised budget.


Sec.  990.320  Audits.

    All PHAs that receive financial assistance under this part shall 
submit an acceptable audit and comply with the audit requirements in 24 
CFR 85.26.


Sec.  990.325  Record retention requirements.

    The PHA shall retain all documents related to all financial 
management and activities funded under operating subsidy for a period 
of five fiscal years after the fiscal year in which the funds were 
received.

    Dated: March 18, 2005.
Michael Liu,
Assistant Secretary for Public and Indian Housing.
[FR Doc. 05-7376 Filed 4-13-05; 8:45 am]
BILLING CODE 4210-33-P